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LEISURE LETTER (03/26/2015)

EVENTS

March 26: Macau Legend 4Q conf call 8:30-9:30pm (EST)

March 27: CCL F1Q, 10am -

COMPANY NEWS

SGMS - currently holds the West Virginia contract to provide the central monitoring system. That six-year, $6.2 million was originally awarded in 2006 and was extended when the six-year term expired. The current contract is set to expire in 2017.

WV Lottery director John Musgrave said the Lottery would like to have the bidding process complete a year before the current contract expires to allow for any transition period that might be needed should a different vendor win the contract.

Meanwhile, the state’s various lottery games generated nearly $94.7 million in revenue in February, about $2.2 million better than the $92.5 million forecast for the month. However, it was about $4.2 million less than the $98.9 million generated in February 2014. Better than expected revenue from video lottery games at the state’s four racetrack casinos, along with a boost in online games thanks to the $564.1 million Powerball jackpot during the month, helped offset a sluggish performance in limited video lottery revenue during the month.

Musgrave said the casinos are seeing a slight increase in consumer spending. He hoped that the improving spring weather combined with improvements in the regional economy will have positive effect on casino revenue in the next few months. “We would like to think we’re seeing an increase in disposable income,” he said.

Takeaway: Can SGMS hold on to the WV contract? In addition, WV casino revenues haven't seen a growth month since June 2012 due to stifling new competition. The decline will continue in March.

CCL - Carnival is ready to order 10 new ships and to sign a construction contract with the two biggest shipyards in Europe, Fincantieri in Italy and the German giant Meyer Werft.

The announcement with the details of the ships, the shipyards involved and the total figure for the agreement are expected by the end of this week, perhaps by Friday. The commission from the American company will be divided equally between Fincantieri and Meyer Werft.

The market price for these units would be between $700 and $800 million each, a figure that would bring the total value of the commission for Fincantieri to $4 billion. Other sources confirm that the order, when announced, should include a new class of ship for the Costa Cruise fleet: a 170,000-tonne prototype that could be ordered with a twin ship.

The other ships should be divided between the American giant’s various brands, Carnival in particular urgently needing a renewal of its fleet. New ships for Aida are also at stake: the group’s German brand, after the complicated construction of its latest ship in Japan, the “AidaPrima”, Aida decided to build its next ships in Europe.

CY Foundation - CY Foundation Group Ltd, the parent of Macau-based casino services provider CY Management Ltd, said its plans to expand slot machine operations have to be extended beyond the original deadlines.

“Given the recent changes in market environment in Macau, the group has not been able to achieve its target to expand the number of gaming machines in operation to 1,000 by the end of this financial year [on March 31, 2015],” the company said in a filing this week.

The company had said in its interim report in December that its goal was to expand the number of gaming machines in operation to 1,000 by the end of the current financial year, and to 3,000 by the end of the financial year ending March 31, 2017.

CY Foundation said it would continue to explore potential sites in Macau and Southeast Asia.

Niraku is selling 30 million shares at HK$1 to HK$1.28 each in the IPO, which closes Friday, Macau Business reported.

The money will be used to build five pachinko halls in northeastern Japan.

The $49.5 million is significantly less than the $100 million to $200 million Niraku originally expected to raise.

Niraku is one of four pachinko operators expected to go public this year.

INDUSTRY NEWS

C

MACRO

Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway: European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

Share

Print

03/25/15 08:04 AM EDT

Long U.S. #Housing + Long Bond

Client Talking Points

UST 10YR

UST 10YR Yield down to 1.87% after CPI for FEB being -0.03% year-over-year and a very tough comp pending in MAR – if the Fed is “data dependent” they’ll get their dovish #deflation data in April (when MAR data is reported). The next immediate-term support line for the UST 10YR is 1.82%, and we’re staying with a re-test of the year-to-date lows as our TREND call.

HOUSING

Evidently a lot of funds were short U.S. housing on the FEB “weather” and that New Home Sales print of 539,000 for FEB took the sub-sector to year-to-date highs (+8.1% vs SPX +1.6% year-to-date); guess what the weather does, sequentially, in March and April? Another great way to be long lower-rates-for-longer too.

FINANCIALS

Financials (XLF) are not a great way to be long lower-rates-for-longer; Yield Spread (10s/2s) compressing right back to year-to-date lows and the sector is now -1.5% year-to-date (vs. TLT +5.8%). Next to Energy stocks, Financials remain our favorite U.S. Sector Style short idea here.

Asset Allocation

CASH

29%

US EQUITIES

16%

INTL EQUITIES

14%

COMMODITIES

0%

FIXED INCOME

26%

INTL CURRENCIES

15%

Top Long Ideas

Company

Ticker

Sector

Duration

MTW

Manitowoc (MTW) is splitting the business into two companies. Given the valuation differential between the sum-of-the-parts and the current enterprise value of the company, the break-up should be a substantial positive. Recent nonresidential and nonbuilding construction data remains firm for 2015, which suggests that MTW’s crane sales should see a pickup in the first half of the year. The Architecture Billings Index (a survey of architects) typically leads nonresidential and residential construction spending by approximately 9-12 months. More importantly, the ABI Index leads MTW Crane Orders by 2 quarters.

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Builder Confidence retreated for a 3rd consecutive month in March and New Home Starts in February saw their biggest month-over-month decline since January 2007. We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather.

While labor supply constraints may serve as a drag to builder confidence, presumably it is rising demand trends that are driving tighter conditions in the resi employment market. All else equal, we’d view improving demand as a net positive. On the New Construction side, while the sharp drop in Housing Starts captured most of the headlines, we believe the real story was in the 3% gain in permits. We'd expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.

TLT

Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Most of the #Deflation trades bounced to something less-than-terrible (both absolute and relative) for 2015, whereas the real alpha trending in macro markets continues to play to the lower-rates-for-longer camp’s advantage.

QUOTE OF THE DAY

STAT OF THE DAY

Headline U.S. CPI increases +0.2%, positive for the 1st time in 4 months and improves to +0% year-over-year (although it’s still negative at -0.03% if you carry out the decimal another place).

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Tall Tales

This note was originally published
at 8am on March 11, 2015 for Hedgeye subscribers.

“If you tell the truth, you don’t have to remember anything.”

-Mark Twain

Let’s call a spade a spade - it’s hard to be 100% honest. I mean we all stretch the truth a little at times. Maybe it is small things like saying you are 6’2" when really you are 6’1", or saying your fund was up double digits when really it was up 8.5% for the year. On some level, it is just human nature to tell a tall tale.

In a paper published in Human Communications Research in 2010, Professor Kim Serota and colleagues attempted to determine exactly how often people lie in their everyday lives. She conducted an online survey of 1,000 people that asked how many times the participant lied in the last 24 hours, the conclusions were as follows:

The average number of lies told per day was 1.65

Only 40.1% reported telling a lie in the last 24 hours

22.7% of all lies were told by one percent of the sample, and half of all lies were told by 5.3% of the sample

No statistically significant sex differences were found in the propensity to lie

So undoubtedly you get the ironic point of the survey, the most honest people in the survey were the ones that actually lied the most.

Back to the Global Macro Grind...

As it relates to central bankers, we haven’t exactly called them liars, but certainly they have misled the investing masses at times. The one exception to that may be the honest Canadian at the head of the Bank of England, Governor Mark Carney.

Yesterday, Carney said what a lot of central bankers aren’t allowed to say, or are afraid to say, which is that the Bank of England would be “foolish” to fight current low inflation. Specifically, Carney said that:

“That’s one of the key judgments the MPC has to make . . . the one thing we can’t do and the thing that would be extremely foolish would be to try and lean against this oil price fall today and try to provide extra stimulus up at this point in time.”

Carney’s point was that to add stimulus now would only lead to undue volatility in the English economy - a lesson certainly the Japanese and ECB should be learning in spades, only they are not.

Back in American central banking land, the WSJ’s Jon Hilsenrath, among other Fed watchers, is suggesting the next move by the Fed will be rhetorical in nature. That is, the Fed is purportedly strongly considering removing the word “patient” from its policy statement. The implication of this move would be that the door would then be left open for rate increases. Well, that is assuming Fed insiders aren’t lying to Hilsenrath and his cadre.

In the Chart of the Day below, we look at employment versus PCE going back some 25 years. As usual, stats don’t lie and what the chart shows us is that the Fed is going to face a real conundrum as it relates to reported inflation and its mandate. Either they can find the truth, like Governor Carney, or yet again the Fed might surprise us all on the dovish side because as the chart clearly shows, at least based on PCE, we are in a deflationary environment.

Now the caveat to that is that employment, at least on the headline metric of the unemployment rate, is indicative of an economy that is operating at tight capacity. Employment is also the foundation of the thesis for most equity bulls. Historically, of course, the employment rate has been much more of a lagging indicator than a leading one. On this topic, we are actually going to do a deep dive on employment on Tuesday March 17th at 11am on a conference call titled: “Employment: The Good, The Bad and The Ugly”. Ping sales@hedgeye if you’d like dial in information.

Switching to Hedgeye stock calls, our Internet guru Hesham Shaaban, has been loudly calling out the management of Yelp. If @HedgeyeInternet is correct in his analysis, Yelp management is likely in the category of the one percent of the sample that tells more than 22% of the lies every day. In a note earlier this week on Yelp titled, “Hiding the Bodies”, Shaaban wrote:

“We originally believed revenues from SeatMe (reservation service) would be reclassified from YELP's Other Services segment into its core Local Advertising segment starting in 1Q15. However, that likely happened in 1Q14. We just didn't realize it because the reclassification wasn't explicitly disclosed in any of YELP's filings until its 2014 10-K filed two weeks ago. Given that its previously-reported 2014 quarterly segment revenues haven't changed within its recently-filed 10-K, we have to assume that the change already occurred in 1Q14.”

So the moral of the Yelp story is, it seems, that if the revenue doesn’t fit your tall tale then just reclassify, but just don’t tell anyone.

The larger issues with Yelp, though, is customer attrition. By Shaaban’s analysis, Yelp loses roughly 80% of customer every year, so the attrition rate is very high. Therefore unless Yelp’s TAM (total addressable market) is unlimited, which it is not, eventually growth will slow and dramatically slow for Yelp. And in a story stock like Yelp, trust me you don’t want to be there when the growth music stops.

CHART OF THE DAY: One Of The Great Leading Indicators (Which The Fed Ignores)

Editor's Note: Below is an excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to learn more, subscribe and get ahead of consensus.

As you can see in the Chart of The Day, one of the great leading indicators that your un-elected Federal Reserve refuses to put on their navel gazing “dashboard” is called the Yield Spread. Leading indicator for the rate of change in US growth, that is…

...With the 10s/2s Yield Spread down to +129 basis points wide this morning, you’ll note that puts it right around its YTD lows (and the Q1 2012 lows). Oh, and Q2 starts 1 week from today – March turning into April is another big time macro call I’m definitely going to make!

Aren't Bigger Calls, Better?

I could go a lot of different ways with that quote, but I’ll stick to Global Macro this morning and go with the wood – America as the world’s superpower!

The aforementioned quote is another beauty from chapter 4, “Enter the Accidental Superpower” (pg 72) where Zeihan reminds us of simple, but very relevant, investment facts:

“From the Louisiana Purchase onward, the Americans have boasted the world’s most capital rich geography… It is the world’s largest agricultural, technological, financial, and based on how you collate the data, industrial power – and has been those things for fifteen decades.”

#timestamped

So why didn’t you think of getting yourself some bigger moneys under management for 0% down and buy some big time American brands like Kraft Foods, for $40 billion US Dollars this morning? Buffett says bigger is better, baby!

Back to the Global Macro Grind…

Maybe I won’t tell you to double down on a broken Old Wall Banker of America (BAC), but I can get you all bulled up on what is made in America and working, big time, in 2015 YTD – Housing and Treasuries!

Long-term Treasuries, that is…

It’s been hard enough to find some sunshine on my face during this Northeastern winter – and God knows this game is hard enough as it is, but on those two longer-term investment fronts, it was a damn good day in the USA yesterday:

US Home Construction ETF (ITB) was +1.2% to +8.0% YTD

Long-term Treasury Bonds (TLT) were +1.0% to +5.6% YTD

And that, my “folks” and friends, was fundamentally driven!

US New Home Sales for FEB smoked the shorts at 539,000 (vs. the 465,000 consensus “estimate”)

HOUSING: post the most snow in Boston since 1872, we’re calling for that to thaw this Spring

RATES: lower-for-longer will remain firmly intact when the March #deflations are reported in April

I know, I know. These are some big calls based on some serious outdoor channel checks. That’s what makes us Canadians who do American macro sound so darn “smart.” #LiveQuotesAndWeather

Oh, and it gets better for the many, even though this is going to start getting painful (again) for the few.

The few that still think they should be overweight levered US Energy and Bank stocks, that is. The rest of us can sip on some all-time highs in American-made growth stocks like Starbucks (SBUX), which is +19.3% YTD, in the meantime.

Yeah, I can get as bullish as the next guy, right before I get run-over. How about you? I love hearing guys talk up their mojo when everything is working for them inasmuch as I enjoy the sweet-sound of spring #crickets, when it is not.

What wasn’t working in America yesterday?

The poor bastard who is long the Ultra Short 20yr Treasury (TBT) is down -12.1% YTD

Financial Stocks (XLF) were down more than the “market” (again) yesterday, -0.8% to -1.5% YTD

Energy Stocks (XLE) were down another -0.7% yesterday to -3.8% YTD

“Poor bastard”? Oh yeah, in coming-to-America-man-with-no-money-terms, I’ve been one of those. Why do you think I have to get up every blessed day at 4:02AM? Being wrong in this business is easier than sleeping in.

America is not a poor country. And now the moneys are falling from centrally-planned-heavens for free. While I can’t reconcile why Swiss 10yr moneys cost -0.12%, why do I need to? Everybody should buy everybody now that global growth is slowing!

As you can see in the Chart of The Day, one of the great leading indicators that your un-elected Federal Reserve refuses to put on their navel gazing “dashboard” is called the Yield Spread. Leading indicator for the rate of change in US growth, that is…

While we remain bullish on #Quad1 for Q1 of 2015 (our year-over-year GDP forecast is higher than Wall Street’s), we were lower on Q4 and we’re forecasting slower in Q2 and Q3.

With the 10s/2s Yield Spread down to +129 basis points wide this morning, you’ll note that puts it right around its YTD lows (and the Q1 2012 lows). Oh, and Q2 starts 1 week from today – March turning into April is another big time macro call I’m definitely going to make!

Risk Managed Long Term Investing for Pros

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